Business Context and Reporting Period
Company: Sunstone Hotel Investors, Inc. (Sunstone)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: Sunstone operates as a Real Estate Investment Trust (REIT) owning, acquiring, and managing upper upscale hotel properties. As of June 30, 2010, the company owned 38 hotels, categorized into 30 hotels held for investment, 8 hotels held for non-sale disposition (Mass Mutual eight), and 2 hotels in discontinued operations (receivership). The company is actively executing a 2009 secured debt restructuring program to reduce leverage.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $341.8 million | $347.5 million |
| Operating Income (Loss) | $19.7 million | $(8.9) million |
| Net Income (Loss) | $(20.8) million | $(123.7) million |
| Loss Attributable to Common Stockholders | $(31.2) million | $(134.5) million |
| Adjusted EBITDA | $74.2 million | $83.7 million |
| Cash and Cash Equivalents | $204.3 million | $194.0 million (End of Period 2009) |
| Total Debt (Carrying Value) | $1.3 billion | $1.4 billion |
| Weighted Average Interest Rate | 5.6% | 5.6% |
Note: Net loss for the six months ended June 30, 2010, includes a $6.7 million gain on extinguishment of debt from discontinued operations. The prior year period included significant impairment charges and gains on debt extinguishment.
Material Changes vs. Prior Period
- Operating Performance: Operating income improved significantly from a loss of $8.9 million in the prior year to a profit of $19.7 million, driven by a reduction in property and goodwill impairment losses (from $28.6 million to $1.9 million) and lower interest expense.
- Revenue Trends: Total revenues decreased slightly by 1.6% year-over-year. Room revenue remained relatively flat (+0.4%), while food and beverage revenue declined 3.1% due to lower banquet activity and restaurant closures for remodeling.
- Debt Restructuring: The company paid $83.0 million to release three hotels from the Mass Mutual loan and reacquired the Renaissance Westchester for $26.0 million, extinguishing $29.2 million of debt. This resulted in a $6.7 million gain recorded in discontinued operations.
- Impairments: Property and goodwill impairment losses dropped dramatically to $1.9 million in 2010 compared to $135.7 million in 2009, reflecting the stabilization of asset values and the completion of major write-downs in the prior year.
- Cash Flow: Net cash used in operating activities was $2.0 million in 2010, compared to $34.4 million provided in 2009. Investing activities used $22.3 million in 2010 (primarily renovations and loan purchases) versus $29.7 million provided in 2009 (driven by hotel sales).
Outlook, Risks, and Management Commentary
- Market Outlook: Management believes the lodging cycle is in the early stages of a recovery phase. RevPAR for the 30-hotel portfolio increased 6.8% in Q2 2010 compared to Q2 2009, driven by occupancy gains.
- Acquisition Strategy: Sunstone intends to deploy a portion of its cash balance ($204.3 million) toward selective hotel acquisitions in 2010, potentially targeting distressed assets or hotel loans.
- Deed Backs: The company expects to complete the deed back of the "Mass Mutual eight" hotels to the lender in satisfaction of the remaining $163.0 million loan balance during 2010. Additionally, the deed back of the W San Diego was completed in July 2010 (subsequent event).
- Risks: Key risks include the potential failure to meet financial ratios for Series C preferred stock (which could restrict common dividends), the impact of the ongoing debt restructuring, and general economic conditions affecting lodging demand.
- Capital Expenditures: The company has $14.3 million in remaining contractual construction commitments for renovations as of June 30, 2010.
Investor Verification Checklist
- Deed Back Completion: Verify the timeline and accounting treatment for the final deed back of the "Mass Mutual eight" hotels and the W San Diego.
- Series C Preferred Stock Covenants: Monitor compliance with financial ratios to avoid a violation that would restrict common stock dividends and increase preferred dividends.
- Reacquisition of Renaissance Westchester: Review the final purchase price allocation and the impact of the hotel's operations on continuing results post-June 14, 2010.
- Loan Portfolio Performance: Assess the collectibility of the two hotel loans purchased in April 2010 (Doubletree Guest Suites Times Square mezzanine loan and Twelve Atlantic Station subordinate note), one of which is in default.
- Refinancing Needs: Track the refinancing of the $81.0 million Hilton Times Square New York mortgage maturing in December 2010.